When it comes time to settlement of a personal injury claim, one of the most frequently asked questions is “do I have to pay tax on this personal injury settlement?”.
Often in June of each year, being the end of the financial year, we are also asked frequently “do I have to declare my personal injury settlement in my tax return?”.
The short answer to these questions is no.
Under the Income Tax Assessment Act, payment of a lump sum amount in relation to a personal injury claim does not give rise to assessable income. What this means is that a lump sum payment for a personal injury claim does not have to be noted in your tax return as taxable income.
It also means that you do not have to pay tax on any lump sum personal injury settlement that you receive. There is no Capital Gains Tax payable on a personal injury settlement.
You must however be careful because if you earn interest on the lump sum amount, then that interest will be considered taxable income and must be noted in your tax return and you must pay tax on it. For example, if you decide to put your personal injury lump sum settlement in a term deposit account, then any interest you earn on that lump sum amount will be taxable.
Also, if you purchase an asset which is subject to Capital Gains Tax, then you will be required to pay Capital Gains Tax in later years when you sell that asset. For example, if you use your personal injury lump sum settlement to buy a house, then in future years it may be subject to capital gains tax if you decide to sell.
This is a very short summary of the tax treatment of a personal injury settlement. It is by no means full financial or accounting advice and Carew Lawyers strongly recommends that you seek financial or accounting advice appropriate to your circumstances.
If you have any questions about a personal injury claim, please do not hesitate to contact Carew Lawyers.